Inflation Puts Pressure on Independent Grocers as Consumers Trade Down

With rising food prices, shoppers are opting for lower-priced grocery chains over locally owned favorites.

This, as the latest governmental data released last week showed that grocery prices in December were up 11.8% year over year, with some categories even higher. Prices for cereals and bakery products were up 16.1%, and dairy prices up 15.3%.

Consequently, consumers are choosing the merchants that can offer them the lowest prices, and more often than not, that means massive chains. Findings from the October edition of the Consumer Inflation Sentiment study, “Consumer Inflation Sentiment: Consumers Buckle Down on Belt-Tightening,” for which PYMNTS surveyed more than 2,600 consumers in September, revealed that 47% of grocery shoppers reported trading down to cheaper merchants.

The grocers that have the resources to price below competitors are the industry giants. Take, for instance, the world’s largest grocer, Walmart.

“Living with high prices through this year has a cumulative impact on our customers, especially for those that are most budget-conscious, and so we’re focused on bringing our costs and prices down as quickly as possible by item and category,” CEO Doug McMillon told analysts on the company’s most recent earnings call in November, later adding, “we believe our strong price positioning is contributing to share gains as we attract value-seeking customers across the household income spectrum.”

As an example, he cited the company’s Thanksgiving strategy of keeping prices the same as they were the previous year. This is an option that is only available to a large company such as Walmart, which in addition to its scale benefits from also selling items in categories with lower inflation rates such as apparel (up 2.9% year over year).

Kroger, too, the country’s largest pure-play grocer, touted its ability to underprice relative to the industry as a competitive advantage over the holiday season.

“We are excited to surprise and delight our customers this holiday season with high-quality fresh products at affordable prices, allowing customers to save on the items that matter most,” CEO Rodney McMullen told analysts in December.

It would appear these kinds of strategies are working for mega retailers, to the detriment of independent players. Research cited in PYMNTS’ recent report “B2B And Digital Payments Tracker®: Tapping The Payments Opportunity In SMB Retail,” created in collaboration with American Express, reveals that, as of this past holiday season, consumers’ positive sentiments about independent businesses are often not enough to get them to shop there.

The Tracker® cites a Bankrate study revealing that 95% of consumers believe small businesses offer at least one advantage over larger ones, but only 33% planned to shop at a small business in person this year.

To navigate this challenging period, independents will need to focus on the qualities that do set them apart — not their scale, granted, but their B2B relationships. John Ross, president and CEO at IGA (the Independent Grocers Alliance), spoke to this advantage in an interview with PYMNTS’ Karen Webster over the summer.

“If you can shorten your supply chain and buy from local farms and local producers, you should have a lower cost of goods,” he said, adding that these goods are also fresher and better tasting. “Those are massive competitive advantages for retailers that tend to be in areas of the country where there’s a lot of food production.”